The forum emphasized the importance of an integrated policy framework
Leading central bankers and economists gathered at the Asian Monetary Policy Forum to discuss the challenges of achieving both price stability and financial stability in today’s complex economic landscape. The forum, held in Singapore, featured prominent figures such as Professor Bernard Yeung from the National University of Singapore Business School and President of the Asian Bureau of Finance and Economic Research (ABFER), and Professor Steven J Davis from the University of Chicago and the Hoover Institution.
During the event, participants reviewed the progress made over the past decade in understanding the intricate relationship between monetary policy and financial stability. They explored three possible approaches for monetary policy in addressing this nexus and shared insights on the evolving role of macroprudential policies.
The first approach discussed was the traditional stance adopted by most advanced economies, focusing monetary policy solely on price stability while delegating financial stability to microprudential regulation and supervision. This approach, although widely implemented, has faced challenges in addressing the growing complexities and risks in the financial sector.
The second approach, proposed by economist Jeremy Stein, suggests including financial stability as an explicit objective of monetary policy. While no central bank has formally adopted this approach, some institutions indirectly consider financial stability implications in their policy decisions.
The third approach, known as “targeting the cracks,” involves keeping monetary policy focused on price stability and utilizing macroprudential policies to address financial stability concerns. This approach has gained traction among emerging market economies, particularly in response to increased capital flow volatility, exchange rate fluctuations, and asset price bubbles triggered by loose monetary policies in advanced economies.
The forum emphasized the importance of an integrated policy framework that combines monetary policy, fiscal policy, and macro-financial policies to secure both monetary and financial stability. Participants highlighted the interactions between monetary policy and the financial system, underscoring the need to consider the implications of monetary policy decisions on financial stability.
Capital flows and exchange rates were also identified as critical factors, particularly for emerging market economies, as they can significantly impact macroeconomic and macro-financial conditions. The forum stressed the need for proactive measures to manage capital flows and limit exchange rate volatility, as well as coordination between monetary and macroprudential policies to mitigate potential trade-offs between financial stability and price stability.
The discussion further emphasized the importance of a diverse range of macro-financial policy tools to address financial sector vulnerabilities effectively. These tools include macroprudential measures, foreign exchange interventions, and capital flow management measures, which, when used coherently, can help safeguard financial stability and mitigate risks stemming from various sources.
While advocating that monetary policy should primarily focus on inflation control, participants recognized the need to consider its implications for financial stability. They cautioned against relying solely on monetary policy to address excessive risk-taking and leverage in specific sectors, as it may prove to be a blunt instrument. Instead, a more flexible approach to inflation targeting was proposed, which would allow sufficient time for inflation to return to the target range and be tolerant of inflation outcomes close to zero.
Lastly, fiscal policy was identified as playing a crucial role in ensuring the sustainability of public debt, thereby reducing the risk of fiscal dominance. The forum emphasized the need for sound public finances to support monetary policy independence in pursuing price stability objectives effectively.
The discussions at the Asian Monetary Policy Forum highlighted the complex interplay between monetary policy and financial stability. Central bankers and economists stressed the significance of an integrated policy framework, combining various tools and policies, to achieve both monetary and financial stability in a rapidly evolving economic landscape.
